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The 124-page report blames Corzine and his management team for bungling an expansion of the company’s traditional business model while ignoring deficiencies in its risk controls. Corzine’s “aggressive trading strategy” that invested heavily in European sovereign debt produced no significant revenues, and he and Chief Financial Officer Henri Steenkamp knew that the company’s controls were flawed as early as May 2010, according to the filing today in U.S. Bankruptcy Court in Manhattan.

Capital and liquidity assumption “were fatally flawed, even though Corzine and other members of his management team knew about their deficiencies many months before they were stretched to their limits” in October 2011, lawyers for Freeh said in the report.

The parent company of brokerage MF Global Inc. filed for bankruptcy on Oct. 31, 2011, after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe’s most-indebted nations. The company, once run by former Democratic New Jersey Governor and Goldman Sachs Group Inc. Co-Chairman Corzine, listed assets of $41 billion and debts of $39.7 billion.

When Corzine joined MF Global in March 2010, the company was already struggling. Corzine moved to diversify the company away from traditional investment of client funds and make it a broker dealer and full-scale investment bank. By September 2010, he had begun asking the board to increase the company’s risk limits to invest in more European sovereign debt. He increased MF Global’s position from $400 million to $8.3 billion between mid-September 2010 and the end of August 2011, according to the report.

In the week leading up to its collapse, MF Global needed to rely on its Operations, Risk, and Treasury Department systems, which were fatally flawed, Freeh found. The failure of Corzine and other members of his management team, including Chief Operating Officer Bradley Abelow and Steenkamp, to address the deficiencies contributed to the company’s demise, Freeh found.

“In the end, the scale of the company’s trading put pressure on the company’s deficient controls without producing any significantly improved revenues,” Freeh said in the report.

Estimated Losses

Freeh estimates the losses to MF Global and its finance subsidiary from $1.5 billion to $2.1 billion. The trustee for the company’s operating brokerage, MF Global Inc., estimated a shortfall of $1.6 billion in customer funds, and has been distributing payments to former customers in a wind-down proceeding that is separate from the Chapter 11 liquidation of the parent company.

Freeh’s findings come five months after U.S. House Republicans also faulted Corzine’s leadership in a report released in November. That report, reached by majority Republicans on a Financial Services subcommittee, described a lack of coordination between the Commodity Futures Trading Commission and Securities and Exchange Commission, primary regulators for MF Global’s U.S. operations.

The SEC didn’t include the CFTC in several meetings in 2011 about the brokerage’s capital and business strategy that would have been helpful for oversight, according to the Republicans’ report. The CFTC didn’t inform the SEC that the broker was using an alternative method of calculating customer funds. Freeh’s report didn’t focus on the shortfall as it is outside the scope of his authority, lawyers for the trustee said in the court filing.

MF Global Holdings is scheduled to seek court approval of its final plan to liquidate tomorrow, which will pave the way for the eighth-largest bankruptcy in U.S. history to wind down under court protection. The plan is supported by Freeh and will repay creditors through income from potential lawsuits.

The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-bk-02790, in the same court.

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